FredBloggs wrote:
No pure income investment has managed this outcome the last 18 months.
Please see my previous reply, specifically regarding the imagined bitcoin investor...
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FredBloggs wrote:
No pure income investment has managed this outcome the last 18 months.
GeoffF100 wrote:If you are living off a HYP and there is a serious crash, your dividends will be hit hard, and you will have to live off whatever is left of your dividends and capital. In the very long term higher yielding shares have outperformed the market, but only as compensation for the extra risk. When high yield shares are popular, as they are now, they command a premium price, and the returns going forward are likely to be lower.
FredBloggs wrote:And, yes again. I describe my strategy as "opportunistic total return investing". I think it fits quite well. But, no, it is not a one time opportunity at all really. If the TR strategy continues to deliver, it's simply a case of rinse and repeat.
A pure income strategy can't match this kind of return. Though I do recognise the tail wind we've had the last few years has been a big help.
FredBloggs wrote:CryptoPlankton wrote:It sounds like an excellent strategy. Could you please let me know what to invest in to make 60% over the next 18 months and I'll sell up all my boring income-oriented holdings immediately!
Sarcasm? I'd love to invest your money for the next 18 months and hand you a 60% appreciation. But I can't. Sorry about that. Now, if you'd given me your money 18 months ago..........
I lived through the 2008/9 crash and I survived living off my dividends (which although saw drops not all dropped very much)
I am not at all sure that high yield shares command a premium price. Legal & General, AstraZeneca, HSBC and Shell, to name but four are, not withstanding the capital increases we have recently seen, yielding well above their historic yields and actually still yield more than the market average. There is not much by way of a premium price in those shares.
I have not done any study of the matter but I do have 20 years of practical experience of living off my dividends and whilst there may be better strategies, this strategy works and I have had to contend with the tech boom and bust in 2000 and the banking crisis of 2008/9. I would much rather rely on dividends than on TR and maybe be forced to sell at just the wrong time.
GeoffF100 wrote:2008/9 was not a proper crash by historical standards.
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Why do you place a higher weight on your limited experience than the aggregated experience of all the people who have ever invested in a stock market?
GeoffF100 wrote:
20 years experience is nothing in the stock market.
GeoffF100 wrote:2008/9 was not a proper crash by historical standards.
The big stocks of the FTSE 100 have had a good run lately. Who is to say that they are not getting over-priced? Most HYPs contain shares in much less solid companies. Carillion is the example currently in focus. A lot of HYPers were very keen on it a while back.
20 years experience is nothing in the stock market. Why do you place a higher weight on your limited experience than the aggregated experience of all the people who have ever invested in a stock market? The clement markets of recent times give a false sense of security.
FredBloggs wrote:Given that we invest for wealth enhancement that we can live off and spend as we choose I reflect that since I moved my portfolio from HL to II in June 2016, the portfolio value has increased by 60%. Much of this reflects the general market tail wind and the 60% gain is mainly capital appreciation from a small number of funds and a small number of shares.
If I cash in the 60% gain and choose to spend it, it will last me for 12 years spending it at a rate of 5% a year. My portfolio remains intact and can fall/rise at the whim of the market but the "income" would be sitting in the bank, ready to spend.
The financial crisis of 2007–2008, also known as the global financial crisis and the 2008 financial crisis, is considered by many economists to have been the worst financial crisis since the Great Depression of the 1930s.
All I can do is quote my experience and draw conclusions on what works for me. Naturally, like most of us I guess, I tend to use my own experience when commenting on public boards like this.
FredBloggs wrote:tjh290633 wrote:If I get this right, your portfolio has grown by 60% and you are proposing to sell 60/160ths, which will reduce your income by about one third. To replace that income you propose to cash in 5/160ths each year for 12 years.
Now, had you retained the investments that you would sell, and the dividend income from those had grown at a modest rate, the odds are that your income from the original portfolio would have grown to be more than your 5/160ths.
You may be expecting capital values to fall, but dividend income has historically held up during such falls, 2008-9 notwithstanding.
TJH
Nope.
I have no portfolio derived income right now, it's all TR.
18 months ago in my portfolio I had 100.
Now I have 160.
I crystallise 60.
Leaving 100 invested for TR.
The 60 I divide by 12 into chunks of 5.
I spend 5 each year for 12 years.
I still have 100 invested for TR, which, perhaps will continue to grow. And may or may not take another haircut as and when required. I can think of no circumstance where a pure income portfolio can achieve this outcome.
FredBloggs wrote:tjh290633 wrote:My real point is that your 5/160ths is only 3% of your total capital. If you stay invested and just take 3% a year, the odds are surely in favour of the total return over the 12 years being rather higher. The cash you have realised will not grow to any extent. There may be a market setback or two in that 12-year period but, evenso, the TR ought to be in the range of 7-10%. My own TR over the 12 years since end of 2005 has been 8.8%, which includes the "Great Recession".
I think that you are doing the equivalent of stockpiling canned food.
TJH
That's one of the main reasons I am not doing so. But I could if I wanted to. My interest in the discussion is to understand why a person would take say 4 to 5% a year from a HYP portfolio with all the capital and income fully exposed to the whims of the stock market. When I can lock into that kind of income virtually risk free leaving only the capital in the market. As I said earlier, I considered an income portfolio seriously before embarking on the strategy I ended up with.
FredBloggs wrote:
My interest in the discussion is to understand why a person would take say 4 to 5% a year from a HYP portfolio with all the capital and income fully exposed to the whims of the stock market.
When I can lock into that kind of income virtually risk free leaving only the capital in the market.
1nv35t wrote:hiriskpaul wrote:divide your pot into two. One pot containing very low risk, low volatiltiy assets ... The other pot contains the risk assets, mainly shares. Income is drawn from the low volatility pot. Dividends from the risk pot are reinvested. When the inflation adjusted value of the risk pot has risen by 20%, 20% of the pot is sold and used to top up the low vol pot. If the income pot is exhausted, the strategy then moves on to drawing down from the risk pot. ...
Best practice for the risk pot is to make it internationally diversified, but otherwise pile it high with risk - overweight value, small caps and emerging markets.
Just a variation of rebalancing. Calendar/tax yearly back to target weightings, or a more variable choice that could at times see % stock relatively rise or decline below target weightings. Would wash overall.
As to maximising diversification between low and high volatility, Zvi Bodie takes that to the extreme, 10% 10x stock equivalent (via long dated Options (LEAPS), 90% low volatility/safe. You can dial that up or down however, through 50/50 less volatile/safe, down to 90/10 mildly risky/safe. Again to similar effect/reward on a overall risk adjusted basis.
Personally I prefer less in more volatile Small Cap Value than total stock market myself. Since 1927 SCV has been around 1.3 times as volatile than TSM. Double that up with 2x leverage and for say 34% target weighting = x 2 x 1.3 = 88 TSM equivalent. If the remainder 66% is in safe bonds then 34 generally covers the leveraging of 2x SCV borrowing cost, leaving 32 bonds. I mentally approximate bonds as being 0.5x stock, so 32 bonds compares to 16 stock. Summed with the 88 = 100% stock equivalent near-as. Given two options, 100% stock or 34% in 2x SCV, 66% bonds and I prefer the latter. As deferring rebalancing to say calendar years to give some breathing space has 2x daily leveraged funds having the characteristic of relatively attenuating (slowing) declines, amplifying gains due to compounding effects (initial 50/50 that sees a decline to 25/50 has shifted from 50/50 weightings to 33/67 weightings during the decline; 50/50 that rises to 75/50 is holding 60/40 weightings). Which can be beneficial. Compare this yearly rebalanced https://tinyurl.com/y722dmfa with adjusting its rebalance frequency to quarterly (using one of the drop down boxes near the top).
Another of the reasons I like leverage is that you can adjust the volatile holdings without having to touch the safe holdings. If bonds are tied up for a year and you want to shift exposure from 100K long stock held as 50K in 2x, to 120K long stock perhaps because stock prices had declined, then selling 20K of 2x to buy 20K of 3x gets the job done without bond liquidity issues.
Yet other benefits are reduced counter party risk (gilts are backed by the state who can increase taxes or print money rather than default and unlike bank protection limits are (within reason) unlimited protection). Also there's the in isolation tendency for leveraged products to decay by around the cost of borrowing they employ to provide leveraged exposure, such decay when held in taxable can generate tax loss harvesting benefits (reduce tax liabilities elsewhere).
FredBloggs wrote:Perhaps a slightly controversial opening post here -
I am guilty of being rather slapdash/lazy at keeping statistics on my investment portfolio(s). Many here seem exceptionally good at that over multi years or even decades. I applaud that. But -
Given that we invest for wealth enhancement that we can live off and spend as we choose I reflect that since I moved my portfolio from HL to II in June 2016, the portfolio value has increased by 60%. Much of this reflects the general market tail wind and the 60% gain is mainly capital appreciation from a small number of funds and a small number of shares.
If I cash in the 60% gain and choose to spend it, it will last me for 12 years spending it at a rate of 5% a year. My portfolio remains intact and can fall/rise at the whim of the market but the "income" would be sitting in the bank, ready to spend.
Why would I choose an income strategy at the present time over my total return strategy? Discuss -
PS - I do not intend this to be a troll-like thread. I am really very interested in hearing what others of a different persuasion make of this.
Income is drawn from the low volatility pot. Dividends from the risk pot are reinvested. When the inflation adjusted value of the risk pot has risen by 20%, 20% of the pot is sold and used to top up the low vol pot. If the income pot is exhausted, the strategy then moves on to drawing down from the risk pot.
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